What is a mortgage loan pre payment penalty?

Answer:

A mortgage loan pre-payment penalty is a clause in the
contract that announces the right of the lender to charge you certain amount of
money if your loan is paid off early in a big lump sum. That usually happens
when consumers refinance, or sell their house.

Lenders will charge a pre payment penalty

In cash - say, $7,000 upon prepayment on
refinance;

As a percentage of the loan - 5% on the loan,
for example;

Or as an interest charge for, say, six months.

Home loan prepayment penalties can be huge on subprime loans.

Subprime mortgage loans are riskier to the lender and to the
investors buying those mortgages on the secondary market. They are also
expensive to underwrite and expensive to the lender to service them. Therefore,
large mortgage prepayment penalties on bad credit loans are not uncommon.

These are the common Option ARM loans that gained bad
reputation in the lasting subprime mortgage crisis. It is too bad that many of
those Option ARMs are predatory loans that finally force borrowers in
foreclosure - in part due to existing prepayment penalties that are charged for
a refinance and borrowers can't afford to pay to get out of a loan which
payments they cannot afford to make after the rate is adjusted.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.